Europe's Botox Bailouts
by Gary North: The
'Mayor Palin' Program: Sarah Palin's Golden Opportunity to Change
bit like botox. It looks good for a while but will eventually start
to sag again." ~ Katherine Garrett-Cox
Mrs. Cox is
the chief executive of England's Alliance Trust investment fund.
She has dismissed Europe's attempts to solve its debt crisis as
"economic cosmetic surgery", warning there is "more pain" to come
over the next few months. So
we read in the London Telegraph.
The media are
beginning to smell blood in the water. Like sharks, they are heading
for the source: the European Monetary Union (EMU). Unlike an emu,
the EMU cannot move very fast. But like the emu, it turns out that
it cannot fly.
this headline: "Sliding toward financial crisis." The article began
with this accurate paragraph: "Three years after the collapse of
Lehman Brothers, the world's financial system is sliding toward
another major crisis."
out that the economic recovery in Europe is on the line. Over the
weekend, finance ministers of the European nations met in Poland
to discuss the extent of the fallout from the default by the Greek
government on its debt. Nothing was resolved.
What, if anything,
can the European Union do? Not much. What can Germany, France, and
solvent Northern European nations do? Send more money to be deposited
in the rathole known as Greece.
in Germany are adamantly opposed to using tax money to fund Greece,
when it is clear to investors that the risk of a Greek default is
interest rate on one-year Greek government notes on September 9
was 93%. On September 11, it
was 106%. On September 14, it
was 117%. It should be clear where Greece is headed: default.
Yet European stocks rose in response on September 15 and 16. Why?
Rumors about another bailout circulated.
It is not clear that the existing promise of the next €8 billion
of aid is going to be honored this month. Greece
is expected to run out of money to pay interest on its debt if the
aid more debt is delayed.
September 19, European stock markets fell sharply. They had been
up the previous week. It is clear that stock investors do not know
what is going to happen. Stocks rise on rumors of bailouts, when
it is clear that even with the bailouts, Greece is going to default.
Then reality reappears, and stocks fall.
EDGE OF THE ABYSS
want desperately to believe that this Greek default can be avoided.
That default, if official, will devastate European banks' holdings
of Greek government debt. Reuters
reported on September 18,
for the Group of 20 talks in Washington on Thursday and Friday
is to prevent a sovereign debt crisis centered in Greece from
turning into a full-blown banking crisis. Such a crisis could
engulf other indebted European countries, lead to messy defaults
and plunge the region and world back into economic and financial
entered a dangerous new phase of the crisis," said Christine Lagarde,
managing director of the International Monetary Fund, last Thursday.
"To navigate it, we need strong political will across the world
leadership over brinkmanship."
President Robert Zoellick a day earlier said: "The time for muddling
through is over."
There is still
some vague hope that the G-20 can come up with a permanent solution.
There is hope that this crisis will calm.
But how? There
is no agreement on which countries will give how much to Greece.
Then there are Portugal and Italy on the sidelines.
pulling money out of French banks, which have over €670 billion
in PIIGS bonds on their books.
THAT SOLVE NOTHING
support growth and ease lending costs, a growing number of central
banks worldwide are loosening monetary conditions an action
likely to win the G20's endorsement for countries where inflationary
pressures are in check.
This plan makes
sense only on the assumption that Greece defaults. The problem Greece
faces is not a liquidity problem. It is a solvency problem. How
will more non-Greek central bank inflation change anything? The
money winds up as excess commercial bank reserves. So, what is this
new fiat money supposed to do? Answer: bail out Europe's largest
Federal Reserve will play its part on Wednesday when it is expected
to announce a plan to lower longer-term interest rates by shifting
the balance of its $2.8 trillion securities portfolio away from
short-term debt. How aggressively it does this, and whether it also
cuts the interest rate paid to banks on their excess reserves held
at the Fed, an idea gaining traction in markets, will signal the
Fed's degree of concern over the economic slowdown.
no sense. Why should the FED's purchase of long-term T-bonds do
anything to solve the Greek default crisis? Also, what does it matter
if the FED cuts the rate paid on excess reserves? It is under 0.25%.
This low rate is irrelevant to bank decisions. If the rate fall
to zero, banks will still keep their money as excess reserves. Yet
some official who talked with the Reuters reporter must have told
her that all this is important. It isn't.
address concerns about the ability of governments to service their
debt, European finance ministers are considering proposals to leverage
their 440 billion-euro European Financial Stability Fund, which
should be up and running by month's end. The United States has suggested
increasing the EFSF firepower roughly ten-fold to give it the capacity
to handle a sovereign bailout the size of Italy or help recapitalize
So, the long-heralded
EFSF is not even in operation yet! Talk about slow responses! The
financial world watches in amazement as the political leaders of
Northern Europe mouth platitudes about the need to defend the euro,
but sit nearly immobile. The politicians assure the public that
the euro is forever, and then they do nothing relevant to solve
the problem of a Greek default and withdrawal from the EMS.
We are told:
the EFSF costs European governments nothing upfront, they duck
the political difficulty of raising more funds if a major EU country
runs into trouble, it provides funds to recapitalize banks if
needed and would earn them market confidence. Semi-annual meetings
at the International Monetary Fund and World Bank this week give
EU leaders a further chance to discuss its merits.
I ask: If this
solution costs nothing up-front, why was there resistance to Timothy
Geithner, who flew to Europe last Friday to pitch this solution
to the assembled finance ministers? How is leveraging the EFSF by
ten-to-one accomplished? What difference will this make to the Greek
sovereign solvency, governments continue to make progress, albeit
slow, in reducing budget deficits. Italy last week adopted a plan
for a balanced budget by 2013. In the United States, President Barack
Obama on Monday lays out his preferred course for medium-term deficit
A promise by
an Italian politician to balance the budget in 2013 means about
as much as President Obama's plan to do lower the deficit (not balance
it) by having Congress tax the rich. Does anyone expect the Republicans
in the House to vote for that? Of course not. But some unnamed source
told the Reuters reporter that all this shows hope.
The final ingredient
is the political resolve to stick to this package of programs. Eswar
Prasad, senior fellow at the Brookings Institution, said the job
of the IMF this week is to nudge countries in this direction and
highlight serious dangers ahead.
is political paralysis, which we are seeing in many of these countries
and could lead to very substantial risks for the longer term. And
that's the big concern," he said.
indecision and paralysis are all that Europe's leaders have displayed
ever since the Greek crisis began in April 2010. The crisis gets
worse, and Europe's leaders show no sign of knowing what to do about
What does all
this mean? It means that Europe has no clear solution to the threat
of a Greek default. Yet the Greek government may default this month.
Greek voters will not tolerate the "austerity" cuts in government
In a remarkable
columnist Janet Daily argued that the entire New World Order
dream of a united Europe is in ruins. This was stretching it, I
think. But it is clear that public confidence is eroding. The assurances
are falling on skeptical ears.
She had always
expected the experiment to fail, but gradually. Instead, it is coming
apart at the seams rapidly.
I expected was growing disillusionment followed by an almost imperceptible
unwinding which would be finessed with political double-talk and
diplomatic duplicity. The implosion would come, but it would be
with a whimper, not a bang. Faces would be saved and enormous numbers
of lies would be told, and somehow the thing would be brought to
an end or made so vestigial that it would no longer matter.
much for that idea. This is going to be huge: so cataclysmic that
it may summon up forms of ugliness that we have not seen walking
abroad in Western Europe for half a century. This is where the
story goes beyond irony.
this forecast too good to be true? Could it be that the decades
of careful planning by promoters of the United States of Europe
are about to be blown up by the Greek debt crisis? She thinks it
is. The politicians are trying to overcome the voters and the currency
markets. They can't.
EU leadership and the Greek prime minister announce implacably that
Greece will not leave the euro (ever), as if their uttering of the
words made them indisputable. In fact, this is simply a statement
of political will that dares the world to defy it.
that the European political class still thinks that an assertion
of its mystical belief can alter reality: that what it insists
is so, will be so. If its idea of itself and its design for the
future are in conflict with the facts of economics or life as
it is actually lived, then it is those facts that will give way.
(A German Christian Democrat politician once said to me, "The
single currency will work because we will make it work.") Those
facts now include not only Greek debt but the democratic wishes
of electorates who have a sentimental belief in their right to
hold their own governments to account. This is where we are: up
against the unavoidable contradiction of the European federal
project. The complaint that the EU is lacking in strong political
leadership is misconceived: it has had altogether too much "leadership"
which is to say, domination from political and bureaucratic
authorities determined to lead with as little interference from
real people as possible.
are fighting political reality now. The voters do not want fiscal
union. The voters want their politicians to be answerable to them.
The centralists will not tolerate this opposition, she says. But
the voters will not tolerate the goal of unification.
"She cannot commit herself to endless bail-outs and the under-writing
of infinite Mediterranean debt, just as the Greek government cannot
deliver the EU's austerity measures because the people of
both these countries do not wish it. The irresistible force has
met the immovable object."
are going to try to ram through their plans, but they will fail.
Voters in Greece will not surrender their sovereignty to the Eurocrats.
They are not alone.
rage and anxiety over this loss of national self-determination are
already taking sinister forms in the rise of aggressively nationalist
parties and neo-fascist movements in the most unlikely "liberal"
countries. Add to that the fears of those recent EU member states
the former Warsaw Pact countries which still look
anxiously to the East toward a rampant Russia. Here is a recipe
for real conflict both within and between the countries of Europe.
We are seeing
the beginning of the breakup of the European experiment in unity.
The critics of unification are gaining ground politically. The planners
did not see the Greek crisis coming. The leaders are scrambling
around, trying to come up with something that will end the crisis.
But the crisis is accelerating.
planners believed that they could substitute their will for the
will of democratic electorates. They also believed that they could
manage the currency better than a free market could. They have proven
wrong on both counts.
The free market
is bringing judgment against the eurocrats. It does not care that
they say the euro is forever. It cares only for profitability.
bank will not let the largest European banks fail. But it will not
be able to bail out the Greek government indefinitely not
with Greek bond interest rates above 100%. The market will dispose
of all assurances that the euro is forever. The botox facelift will
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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